New facets of pure economic loss rule could have huge implications for businesses

A fight over Canada’s corn market has opened possibilities in how the law treats liability for businesses, and the duties owed to others within an industry, lawyers say.

While the new ruling is in the early stages of an Ontario class action, it potentially widens the scope of the rule of pure economic loss to include an exception called “premature commercialization,” says Matthew Baer, who represented the appellant in the case, Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789. In particular, the case could pave the way for damages when a competing business brings a product to market early without addressing all the risks to the overall market.

“The allegation in this case — is that Syngenta, the defendant, prematurely marketed genetically modified corn seed knowing they didn’t have foreign approvals, which would, foreseeably, cause imports from China to be rejected — causing a glut in the market in North America, causing prices go down here, which caused damages to the corn producers in North America,” says Baer, a partner at McKenzie Lake Lawyers in London, Ont.

“The defendants had been given warnings about doing this and chose to do it anyway. I think it’s great that the court is saying this is a fact pattern where there is foreseeability that what you're doing is going to cause damages — and that people should be able to recover those damages.”

Still, Alyssa Tomkins, an Ottawa-based lawyer at Caza Saikaley says other policy considerations to prevent such harm — such as the role of contracts, insurance and regulators — may come into play.

Syngenta Canada Inc. began selling genetically modified corn seed in 2010, which was approved by Canadian and American regulators, but not Chinese regulators. At the time, China was “a large and growing export market” for North American corn, but when the GMO corn was discovered in China, Chinese regulators banned all North American corn.

That led to an over-supply of corn in the U.S. and Canada, driving prices lower. Plaintiff Darmar Farms Inc. did not buy the GMO seed, but the crops inevitably co-mingled, said the Oct. 4 decision, written by Justice Benjamin Zarnett, with Justices Grant Huscroft and Gary Trotter concurring.

“Major industry associations, of which Syngenta is a member, have publicly recognized that there is a potential for major trade disruptions if approvals in major international markets are not obtained before a product is commercialized,” Zarnett wrote.

Syngenta brought a motion to dismiss Darmar’s proposed class action on behalf of other Canadian corn growers. The trial judge, Justice Helen Rady of the Superior Court of Justice, found that it was plain and obvious the claims based in negligence could not succeed.

Amid smaller issues (such as the status of class members in Quebec,) there were two large issues explored by the court of appeal. First, the court explored whether there was a reasonable prospect of success to challenge Syngenta’s alleged misrepresentations about applications for approvals in China. Second, the judges looked at the claim for premature commercialization.

The appeal court upheld part of Rady’s ruling to dismiss the claims of misrepresentation, noting that Syngenta’s marketing was aimed at customers, and Darmar did not buy the corn seed.

But, the court also found Rady’s lower court decision had erred on the claim that Syngenta sold the corn before it was approved in China. It was not a completely lost cause for Darmar to try and establish Syngenta had a duty of care to not prematurely commercialize the corn.

Rady had noted that premature commercialization did not fall under a “previously recognized category” for pure economic loss, deciding that the claim was only framed as misrepresentation.

The court of appeal judges, however, said the two issues were distinct. The appeal judges looked at the parallel case in the U.S., analyzing whether it was fair and just to impose a duty of care on Syngenta because of its proximity to Darmar in the corn market. The appeal court also looked at whether Syngenta could have foreseen potential economic damage.

“The fact that a claim is novel is not a sufficient reason to strike it. But the fact that a claim is novel is also not a sufficient reason to allow it to proceed; a novel claim must also be arguable,” Zarnett wrote. “Syngenta’s product was dangerous to Darmar, a non-purchaser of it . . . . At the pleading phase of this action Darmar has a reasonable prospect of showing that a duty of care arose.”

Andrew Bernstein, a partner at Torys LLP in Toronto, says that the common law has struggled for decades in dealing with negligence law when the relationship is economic — as opposed to a consumer who suffers illness or injury from a product, for example.

“The significance of this case is that it extends product liability, potentially, beyond physical harm to economic harm,” says Bernstein. “These cases, in a way, feel obscure because they are based on a semi-obscure legal nicety. But in reality, they have a potentially enormous impact, because they set out the potential liability that a business has, if it does something negligent . . . . the specific nature of the harm isn't that important here, what's important is the legal principle that you could potentially be liable for it.”

Baer notes that the case is far from decided and must proceed next through a certification motion. Still, the decision raises interesting possibilities, he says.

“If you have the right facts in your case and are able to make the right arguments, you can create new exceptions which could apply to your case and or other cases. You should always look at that possibility,” he says.

The Supreme Court is also soon set to rule on a similar case, 1688782 Ontario Inc. v. Maple Leaf Foods Inc., et al., which may further illuminate this area of law, says Bernstein. Baer says as it stands, there is still confusion in the bar in how to apply the pure economic loss rule.

“In my opinion, this pure economic loss rule is outdated and unnecessary. Really, it would be better to be folded to the usual analysis on proximity and foreseeability — it certainly doesn't make any sense that actors who inflict only economic losses are shielded from liability,” says Baer.

Given the rarity of new exceptions to pure economic loss — defined by the Supreme Court of Canada — the case “obviously novel” and worth following, particularly for industry associations, says Tomkins. But, Tomkins says, the case may settle, or the full evidentiary record might not bear out a cause of action.

While it could open the door to a pure-economic-loss exception, Tomkins says aspects of the case are fact-specific and there are several areas of the decision that are unusual. 

The decision determines whether a duty of care exists using the modified Anns/Cooper test cited by the Supreme Court of Canada in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (CanLII), [2017] 2 S.C.R. 855: “first, whether a prima facie duty exists and if so, second, whether residual policy considerations should negate or limit the duty.”

In other words, the judges write in Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789, the court considers whether the parties are in a close and direct relationship, and whether the consequences of negligence could have been reasonably predicted. Then the court looks at whether the defendant should nonetheless be shielded from responsibility because of policy considerations.

The Supreme Court wrote in Deloitte & Touche v. Livent Inc. that the general framework set out in Anns and later refined in Cooper “applies in cases of pure economic loss arising from an auditor’s negligent misrepresentation or performance of a service.”

Tomkins says the court had an interesting approach in Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789 when looking at the Anns/Cooper test and the undertaking — examining not only allegations of negligent misrepresentation and negligent performance of a service but also in the context of a novel duty of care.

“It wasn't clear to me at that had happened Court of Appeal level anywhere — I had seen trial level decisions that apply that undertaking outside of those two categories,” she says.

Further, says Tomkins, in Darmar Farms Inc. v. Syngenta Canada Inc., 2019 ONCA 789, the court limited its residual policy considerations to the concept of indeterminacy — where the scope of liability is impossible to figure out with legal tools, such as liability in an indeterminate amount, liability for an indeterminate time and liability to an indeterminate class.

“Those three aspects of indeterminacy were considered to be potentially quite problematic, generally in claims pure economic loss. It makes sense because the relationships don't tend to be as direct,” she says. “Nevertheless, the Supreme Court has repeatedly raised other residual policy considerations against expanding the categories of pure economic loss . . . In cases of economic loss, should these kind of relationships be defined by contract? Are there other ways people can protect themselves from the particular harm, such as insurance? Whether recognizing the duty of care in question would turn the court into a regulator?”

Counsel for Syngenta declined to comment on the case.